Midwest Maneuvers

A year ago, when we recommended Mercantile Bancorp (NYSE: MTL), the St. Louis company looked to be in the right place at the right time. Merger fever in banking was spreading into the Midwest, and Mercantile seemed like the perfect play during industry-wide consolidation.

Instead of being acquired, Mercantile gobbled up two smaller Missouri- based financial institutions in late ’96. Raymond Stewart, of WRM Equity Management, who recommended the stock last year, says the moves aren’t necessarily a sign that Mercantile won’t woo suitors. Instead, he says, “both really enhance Mercantile’s franchise at a time when a lot of banks are still looking for a Midwest base.” And with NationsBank snatching St. Louis-based Boatman’s last year, competitors aiming to establish coast-to-coast operations might give Mercantile a second look. That has helped push its shares upward from $44 to $56.50 recently, a 28% gain. That means a $1,000 investment a year ago would now be worth about $1,280.

Stewart says the bank’s price could rise another 20% in the next 12-18 months. Mercantile still looks cheap by some criteria, he says, with the company slated to earn $4.20 a share this year and $4.60 next, compared with a merger-adjusted $3.10 last year. Mercantile’s share price is now pegged at 12 times its estimated 1998 earnings, but Stewart believes the market might reward the company with a higher ratio this year.